Loading the player...

What are 'Barriers To Entry'

Barriers to entry are the existence of high startup costs or other obstacles that prevent new competitors from easily entering an industry or area of business. Barriers to entry benefit existing firms already operating in an industry because they protect an established company's revenues and profits from being whittled away by new competitors. Common barriers to entry include special tax benefits to existing firms, patents, strong brand identity or customer loyalty, and high customer switching costs.

BREAKING DOWN 'Barriers To Entry'

Some barriers to entry exist as a result of government intervention, while others occur naturally within the business world. Often, existing firms within an industry lobby for the government to erect new barriers to entry. Ostensibly, this is done to protect the integrity of the industry and prevent fly-by-night operations from setting up shop and hawking inferior products and services. In reality, firms favor barriers to entry when already comfortably ensconced in an industry to limit competition and claim a larger share of the industry's revenue. Other barriers to entry occur naturally, often evolving over time as certain industry players establish dominance.

Government Barriers to Entry

Industries heavily regulated by the government are usually the most difficult to break into; examples include commercial airlines, defense contractors and cable companies. The government erects formidable barriers to entry in such industries for varying reasons. In the case of commercial airlines, not only are regulations stout, but the government limits new entrants in an effort to limit air traffic and make monitoring easier. Cable companies are heavily regulated and limited in number because their infrastructure requires extensive public land use.

Sometimes the government imposes barriers to entry not by necessity but as a result of lobbying pressure from existing firms. For example, in many states, government licensing is required to become a florist or an interior decorator. Critics assert that regulations on such industries are needless, accomplishing nothing but limiting competition and stifling entrepreneurship.

Natural Barriers to Entry

Barriers to entry can also form naturally as the dynamics of an industry take shape. Brand identity and customer loyalty serve as barriers to entry for outsiders. Certain brands, such as Kleenex and Jell-O, have identities so strong their brand names are synonymous in the common lexicon with the products themselves.

In industries where customers incur high costs switching from one brand to another, this becomes a de facto barrier to entry for new firms, as they face difficulty enticing prospective customers to pay the money required to make a change.

RELATED TERMS
  1. Open Market

    An open market is an economic system with no barriers to free ...
  2. Double One-Touch Option

    A type of exotic option that gives an investor an agreed upon ...
  3. Customs Barrier

    Any measure designed to limit international trade. A customs ...
  4. Down-and-In Option

    A form of barrier option that becomes activated only if the price ...
  5. Up-and-In Option

    An option that can only be exercised when the price of the underlying ...
  6. Nontariff Barrier

    A nontariff barrier is a trade restriction that takes a different ...
Related Articles
  1. Trading

    Price Action in These ETFs Deserves Attention

    These strong ETFs are near trade levels, but are the trades worth taking?
  2. Trading

    How Do Limit Orders Work?

    Picking entry and exit points can be a big challenge for investors. Find out how limit orders can help you buy and sell a stock at the price you want.
  3. Insights

    The Effect Of Trade On International Growth

    According to the World Trade Organization, world merchandise trade value grew by 20% in 2011, to $16.7 trillion.
  4. Trading

    Trading Risks And Rewards In Your Favor

    Measure reward and risk targets before taking a trade, and let those numbers guide your open position.
  5. Insights

    The Basics Of Tariffs And Trade Barriers

    Everything you need to know about trade barriers and tariffs and their effects on the local economy.
  6. Small Business

    Facebook's Expansion Into China

    Expanding into China would greatly help Facebook's growth and revenues, but the barriers to entry may be too strong.
RELATED FAQS
  1. What are the key barriers to entry for companies in the electronics sector?

    Learn how the entry barriers of economies of scale and scope, research and development, capital and brand loyalty affect ... Read Answer >>
  2. How strong are the barriers to entry for new companies in the telecommunications ...

    Discover the significant barriers to entry, such as the necessity for high capital expenditures, for new companies in the ... Read Answer >>
  3. What are the major barriers to entry for new companies in the drugs sector?

    Find out why barriers to entry for U.S. drug companies are so high and how the Food and Drug Administration, or FDA, inhibits ... Read Answer >>
  4. How do sunk costs create a barrier to entry for new firms?

    Learn about sunk costs, what these costs are and how the size of sunk costs can create barriers of entry to a market for ... Read Answer >>
  5. What is a utility stock?

    Investing in difficult economic conditions requires knowledge of different stock classes. Utility stocks are one vehicle ... Read Answer >>
  6. What is double entry bookkeeping and how does it work in the general ledger?

    Learn about the double entry method of bookkeeping and how it works in the general ledger. Every accounting transaction has ... Read Answer >>
Hot Definitions
  1. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  2. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  3. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  4. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  5. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  6. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
Trading Center